Scott Eells / Bloomberg via Getty Images

Drought

Will Food Prices Jump After the Heat Wave?

Matthew Zeitlin on which product prices could be most affected by this summer's punishing drought.

08.11.12 4:10 PM ET

Scott Eells / Bloomberg via Getty Images

With a giant swathe of the nation’s prime agricultural land affected by drought, the federal government and private forecasters have been projecting a significant drop in corn and soybean production—and a jump in food prices. Until this week’s report on worldwide supplies of agriculture commodities from the Department of Agriculture, however, there have not been any projections based on actual surveys of the affected crop. Today’s numbers, in line with expectations, foresee a giant drop in the amount of corn and soybean that will be harvested, and basically ensure a jump in prices across the wide range of food products that use soy and corn.

The forecast for corn yield, the bushels of corn harvested per acre of planted, fell to 123.4, a drop from last month’s forecast of 146 bushels per acre. The continued slide in projected yields is particularly sharp considering that this corn crop was the biggest in more than 70 years. The yield is projected to be the lowest since 1995. The big drop in corn production means, in the words of the report, a “sharply higher price outlook” for corn. The projected price for corn soared to $7.50-to-$8.90 per bushel; last month’s projections were $5.40-to-$6.40 a bushel.

The report told a similar story for soybeans, which are used primarily to make food oils, biodiesel, and livestock feed. According to their first survey of this year’s crop, the report found that the projected yield dropped to 36.1 bushels per acre, 4.4 bushels from the previous projection and 5.4 bushels below last year’s actual yield. The total stock of soybeans dropped to a nine-year low, a 12 percent drop from July’s projected figures. The report projected soybean prices to be between $15 and $17 a bushel, up $2.

According to the USDA, just under 90 percent of the corn and soybean crops are in drought areas and around 50 percent of the corn crop is rated “poor” or “very poor,” along with 39 percent of the soybean crop. The decreased yield means that the supply of corn and soy—and the retail food products that use corn and soy—must be rationed by the market.

But what does this mean for food prices? There is not any new federal government data until the end of this month, but “higher corn, wheat, and soybean prices will all get transmitted to consumers over the next several months,” says USDA Chief Economist Joseph Glauber. The first increases are expected to be in vegetable oil, while beef, pork, and poultry—all of which use corn and soy for feed—will take longer. In fact, in the short term, the meat market might be flooded as ranchers and producers bring their animals to market because feeding them has gotten—and will get—too expensive.

In fact, slaughters of female pigs shot up to an eight month high due to high feed costs. The USDA projects temporarily higher beef supplies as dairy cows are slaughtered because of high costs, but Glauber cautions that in the long term, prices for meat will go up. Prices for packaged foods that use corn, like corn meal and cereal, are projected by the USDA to start reflecting higher prices in 10 to 12 months.

The August numbers are considered to be more accurate and useful than previous months’ crops projections because they are based on a combination of USDA surveys of actual crops—which includes surveyors literally counting the number of ears on corn stalks as well as weighing the grain. They then supplement this data by asking farmers what they expect their crop yields to be. By contrast, the previous reports make their projections based on the condition of the crop, not actual measurements, according to Glauber.

But we are still only dealing with a projection; the harvest does not happen until the fall. “There is some variance in that August estimate. You can see some changes,” says Glauber.